Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers

We study the optimal pricing of a finite quantity of a fashion–like seasonal good in the presence of forward–looking (strategic) customers. We distinguish between two classes of pricing strategies: contingent and announced fixed–discount. In both cases, the seller acts as a Stackelberg leader announcing his pricing strategy, while consumers act as followers taking the seller's strategy as given and determining their purchasing behavior. In each case, we identify a subgame–perfect Nash equilibrium and show that given the seller's strategy, the equilibrium in the consumer subgame is unique and consists of symmetric threshold purchasing policies. For both cases, we develop a benchmark model in which customers are nonstrategic (myopic). We conduct a comprehensive numerical study to explore the impact of strategic consumer behavior on pricing policies and expected revenue performance. We show that strategic customer behavior suppresses the benefits of price segmentation, particularly under medium–to–high values of heterogeneity and modest rates of decline in valuations. However, when the level of consumer heterogeneity is small, the rate of decline is medium–to–high, and the seller can optimally choose the time of discount in advance, segmentation can be used quite effectively even with strategic consumers.